Utah Pass-Through Entity Withholding Tax Rules

Utah defines a pass-through entity (PTE) as an entity whose income, gains, losses, deductions, and credits flow through (via a Schedule K-1) to its owners for purposes of paying income tax.  A PTE is subject to Utah withholding requirements if one or more of its owners is an entity or is a Utah nonresident individual.  Therefore, this withholding is not strictly a nonresident withholding tax.  Withholding is also required if the PTE has an entity owner, even if that entity-owner is located in Utah and is owned by Utah residents.

The PTE withholding tax began in 2009 and applied to general partnerships, limited partnerships, limited liability partnerships, limited liability companies (if classified as a partnership for federal income tax purposes), and S corporations.  Composite nonresident tax return filings were eliminated at that time.  Beginning in 2013, trusts and estates will also be classified as PTEs if they distribute (or are required to distribute) income to beneficiaries.  Entities that are disregarded for federal purposes are classified in the same manner as for federal income tax.

A PTE is required to withhold 5% on allocations to entity owners or nonresident individual owners of Utah business income and any non-business income derived from or connected with Utah sources.  Portfolio income is categorized separately from non-business income if the PTE owner is not required to include the portfolio income as Utah income.  Portfolio income is attributable to the state of the PTE owner's residency.  Portfolio income generally includes gross income from interest, dividends, royalties, capital gains, and certain other items if not earned in the ordinary course of the PTE's trade or business.

The withholding tax must be paid on or before the original due date (without extensions) for the PTE's tax return.  The PTE must provide a Utah Schedule K-1 to its owners showing the allocated withholding amount.

A PTE may elect a waiver of its Utah withholding requirement.  The waiver may be for one or more of its owners subject to withholding.  However, if the owner fails to file a Utah income tax return and pay its Utah tax, the PTE will be assessed the tax, including any interest and penalty.

A special rule applies if the PTE intending to elect a waiver is itself also owned by a PTE (a "downstream" PTE), and the downstream PTE is owned entirely by Utah resident individuals.  In this case, the waiver can only be elected if all of the downstream PTEs and Utah resident individuals file their tax returns and pay their Utah tax on or before the PTE's Utah tax return filing due date, including extensions.  This will require Utah resident individuals to file their extended tax returns one month earlier than otherwise allowed.  For example, assume XYZ, LLC operates a Utah business and is partially owned by ABC, Ltd. (a family limited partnership) that in turn is owned solely by Utah resident individuals.  Assume XYZ, LLC's and ABC, Ltd.'s tax return due dates are April 15th and that they have obtained five-month extensions (maximum extension period for partnerships) to September 15th.  Assume further that the Utah resident individuals have obtained six-month extensions (maximum extension period for individuals) moving the due date of their tax returns to October 15th.  In order for XYZ, LLC to be eligible to elect a waiver from the Utah withholding requirement applicable to the ownership interest held by ABC, Ltd., both ABC, Ltd. and all of its Utah resident individuals must file their Utah tax returns, and pay their Utah income tax, by September 15th, the filing due date for XYZ, LLC, even though the Utah resident individual income tax returns aren't due until October 15th.